UK in push to consolidate defined benefit pension schemes into ‘superfunds’

The consultation paper (68 page / 688KB PDF) suggests that encouraging a well-managed superfund sector could be a more effective way of managing liabilities. In particular the DWP suggested that employers would be incentivised to inject funding into pension schemes to enable them to enter a superfund, so discharging legacy liabilities and allowing companies to focus on their core business.

The government said superfund schemes would protect savers through a capital buffer, reducing the risks associated with employer insolvencies, improve the likelihood of members’ benefits being paid in full, and enable access to a wider and potentially more innovative mix of investment opportunities.

The consultation builds on proposals published in March this year to strengthen DB protections, handing the Pensions Regulator (TPR) more powers and creating a new criminal offence to punish wilful or reckless behaviour by company directors.

Pensions expert Robert Tellwright of Pinsent Masons, the law firm behind Out-Law.com, said the consultation followed earlier work in the area of defined contribution schemes.

“As expected, the DWP is proposing an authorisation and supervision regime for DB consolidation vehicles which borrows heavily from the similar regime which is currently being rolled out for defined contribution master trusts,” Tellwright said.

He said the government needed to balance the benefits of superfund structures for companies and members against the increased risks posed by these structures, compared to insurance-based solutions.

“One of the key issues the DWP has to grapple with is how to encourage the development of these consolidation solutions – which will be attractive to corporate sponsors and may well improve outcomes for members of certain DB schemes due to their scale – without undermining the market for insurance-based solutions, which ultimately provide the greatest level of security for scheme members,” Tellwright said.

“To do this, it proposes a ‘regulatory gateway’ – so that a pension scheme would not be able to pass its liabilities to a superfund where there is a realistic prospect of the scheme securing its benefits in the insurance market in the next five years or so,” Tellwright said.

“It remains to be seen whether this will appease the insurance market, which will be quick to point out that whilst the DWP’s framework should protect superfund members against a one in 100 year shock, this compares less favourably to the insurance regime, which is designed to withstand up to a one in 200 year event,” Tellwright said.

The government proposals suggest that trustees will decide whether to transfer a scheme into a superfund, subject to eligibility conditions which may be imposed by regulation. Before agreeing to the transfer they will need to see evidence that members’ benefits are better protected in the superfund than they would be remaining in the sponsoring employer’s scheme.

Trustees will have to notify TPR of their intention to transfer to a superfund. Although TPR would not be the decision maker in every transaction to a superfund, it would have to undertake a basic “triage check” to identify transactions with significant risks. It would have the power to intervene and prevent transactions from taking place if the move to a superfund was not in members’ best interests.

DWP said it envisaged that superfunds would be classed as a type of DB occupational pension scheme, with the employer covenant replaced by a capital buffer provided by investors. It acknowledged that the risk profile of superfunds differed from traditional DB occupational schemes, and said additional safeguards would be needed to ensure that members’ benefits and the Pension Protection Fund are properly protected, and to make sure a sensible and sustainable balance is struck between the interests of members, the sponsoring employer, and the superfund investors.

The consultation period runs until 1 February 2019.